By Nate Hansen, CPA
As a 1099 medical professional, you may have heard buzz around the need to consider forming an entity. The different types of entities can be confusing and can vary by state. The most important thing to remember is that everyone’s scenario is a little different. There are several factors that need to be considered, including level of income, marital status, location(s), etc. Seeking professional advice is strongly recommended to ensure you select the right solution for your scenario. In the meantime, here are some basics to prepare yourself for that discussion.
A sole proprietor is an unincorporated entity. This structure allows you the ability to write-off business expenses on the “Schedule C” form of your personal tax return (side note: business expenses incurred by someone employed in a W-2 position are no longer deductible as unreimbursed employee business expenses pursuant to the latest tax reform). You can also take advantage of some of the new tax rules like the QBI 20% Pass-Thru deduction. Being taxed as a Sole Proprietor is a low maintenance option that doesn’t even require you to set-up an EIN (Employer Identification Number, aka Federal Tax Identification Number). If you are a 1099 physician, you file as a sole proprietor by default unless you set-up one of the entities described below.
Limited Liability Corporation (LLC)
Some employers require their 1099 medical professionals to set-up an entity, such as an LLC. This kind of entity may also provide some liability protection as it separates your personal assets from the business. While an LLC or other entity type may provide some personal liability protection, it typically does not cover any “on-the-job” protection; however, that should be covered by your malpractice insurance normally provided by the facility. An LLC that is 100% owned by a single individual is disregarded for tax purposes and taxed as a sole proprietor, so all income and deductions are reported on your personal tax return. It should also be pointed out that some states use a PLLC designation (Professional LLC) as opposed to a regular LLC for medical professionals, but there is no difference from a tax standpoint.
Prior to tax reform, an S Corporation was typically a great option for 1099 physicians who made more than $350,000 (in states that recognize this entity type). An S Corp is more expensive to manage but could provide more tax savings (particularly Medicare tax savings) resulting in more disposable income in your pocket.
Post tax reform, the $350k threshold is a little more complex. A new rule allowing a 20% pass-thru deduction (aka Qualified Business Income Deduction, aka QBI Deduction) is saving many 1099 physicians thousands in taxes, assuming they meet the income thresholds. See here for a short webinar explaining how the QBI deduction works. With this new rule, only the S Corp “Pass Through” income qualifies for the QBI deduction (vs. your “Wage Income”). Ask a CPA to help you model whether or not a S Corp will maximize your tax savings in combination with the QBI deduction.
A common misconception is whether or not you need to have an entity in order to hire your spouse. Or do you have to have an entity to create certain retirement plans or to deduct your business expenses? The answer to those questions is “no”; you have the ability to do all of those things as a sole proprietor or LLC. However, in order to pay your spouse a salary and/or open an individual 401(k) account, you would be required to get a separate Federal ID Number from the IRS.
As you determine if you have the right entity structure set-up for your business, work with a CPA to talk through the specifics of your scenario. In most cases, the complexity associated with this decision-making process warrants a phone call or an in person meeting rather than trying to talk through the logistics via email. You don’t have to do this alone!
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